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Moumita Bakshi

Vinnie Mehta on the Union Budget and on what hardware needs.

THE last week of February, which saw the tabling of the pre-budget Economic Survey in Parliament and the Union Budget 2005-06, is bound to have far-reaching implications for the Indian IT hardware sector.

The Survey, this year, took note of `welcome acceleration' in the hardware sector, saying the rate of decline of its share in the overall electronics and IT basket had come down sharply.

Close on its heels, the Union Budget kept India's commitment on a zero-duty regime under ITA-1.

As the industry busies itself studying the precise implications of the Budget, eWorld caught up with hardware association MAIT's executive director, Vinnie Mehta, for his take on the Budget and its impact on Indian and MNC companies in the hardware sector.

What is the total size of India's IT hardware sector (personal computers, components combined) and at what rate has the industry been growing in the last two-three years?

The IT hardware market is about $5 billion today. Exports account for an additional $1.25 billion. The PC market is growing at 30 per cent plus and for financial year 2004-05, we expect the market to clock 4 million units in PC sales.

This will take PC penetration in the country to 14 per 1,000 from 11 per 1,000 in 2003-04. We project the industry growth to be a steady over 30 per cent for at least the next two to three years, and in fact it can only get better.

Is the current growth rate at a satisfactory level? If not, what are the measures required to be taken by the Government to give a fillip to this sector?

We are very happy that the Government is focussing attention on the hardware sector. The Union Budget strives to make local IT manufacturing competitive and also the National Manufacturing Competitive Council (NMCC) has identified hardware as one of the growth areas.

We expect that during the course of the year the Government will announce definite measures to promote the hardware sector. I believe from a competitive perspective, making hardware manufacturing viable, and enabling the local market to reach a global scale, go hand in hand.

While the market growth has been steady, our consumption in the local market is yet to reach global levels — say the PC penetration is 14 per 1,000 in India while China is close to 40 per 1,000; developed nations would be 600 to 700 per 1,000.

We need to find creative solutions for a market like India to spur consumption. The Government and the industry need to actively play a role to improve IT consumption and thus penetration. We need to identify mission-mode projects, say e-education, e-health and integrating the agricultural value chain using IT.

E-governance needs to gather steam and successful pilot projects need to be replicated quickly. Projects with definite targets, executed in a mission mode, can deliver effective results. Similarly, to develop the consumer market, banks need to offer easy loans, as in case of the auto or the housing industry.

The industry needs to create a value proposition for consumers, local language content, with relevant local context. Effective delivery of citizen services could be a clincher.

Finally, investment in IT manufacturing needs to be incentivised or else we will keep losing investments to other competing countries.

What did the Union Budget bring for the IT hardware sector?

As I said earlier, the Union Budget is a clear indication of the focus of the Government on the hardware sector.

The Union Budget sets right the mathematics for manufacturing — it removes the negative differential that a local manufacturer would have faced due to the implementation of the IT Agreement.

Also, it provides a level-playing-field to the domestic industry by levying an additional duty on the imports, thus equating it to the VAT on locally-manufactured products.

It also identifies education, healthcare and rural development as key focus areas. I believe IT has a key role to play in each of these.

How will these announcements impact the fortunes of the various sections of the Indian hardware sector? Are there any anomalies that need to be addressed from the point of view of the industry?

Fundamentally the announcements are sound. However, we have a problem in the PC industry. The PC does not attract any Excise duty, as a result, any additional tax on the inputs cannot be cenvatted (offset), as is the case with the recently-introduced four per cent additional duty on all ITA products.

The industry will have to absorb the additional duty and unfortunately this neutralises the benefit of cost reduction due to abolition of customs duty on inputs. Therefore the prices of locally manufactured PC will not come down.

Also, it makes the manufacturing of high-end products such as notebooks, servers, etc, unviable as the cenvat overflow is large.

What does MAIT seek from the forthcoming Foreign Trade Policy?

The Foreign Trade Policy has certain well-thought-out schemes, such as the EHTP (Electronic Hardware Technology Parks) scheme, which are tailor-made to the requirements of the hardware sector.

They need to be fine-tuned in the light of the recent policy changes, especially the IT Agreement, wherein most IT products have been brought to nil customs duty. Extending benefits of EHTP to products at nil excise and also to excise-free zones, exemption of Central Sales Tax on local inputs for EHTP and simplification of transactional procedures are some of our key recommendations.

moumita@thehindu.co.in

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